Wednesday, November 12, 2008

As both Mark Perry and the Wall Street Journal recently have noted, the problem with the Detroit auto industry is not going to be solved by lending them more money. GM's labor costs are so far above those of any foreign competitor (or any industry for that matter) that there is only one solution: bankruptcy.

GM could declare bankruptcy today, Toyota could buy its assets, and plants could reopen on Monday, offering jobs to those laid off that would pay wages competitive with those paid by other auto companies. The reorganized assets of GM would become instantly competitive. The auto unions are like a parasite that is killing its host, and it looks like they will succeed. But that doesn't mean the end of the Detroit auto industry, it simply means that eventually Detroit autoworkers are going to have to accept lower wages if they want to keep their jobs.

The $25 billion bailout being discussed in Congress today won't do anything but postpone that day of reckoning. It does nothing to fix the fundamental problem, which is excessively high labor costs.